The yen declined the most in more than two years against the dollar as the Group of Seven nations jointly intervened in foreign-exchange markets for the first time in more than a decade.
Japan’s currency slumped against all its major counterparts as the Federal Reserve and Bank of Canada joined the Bank of Japan and European central banks in an effort to sell the yen. G-7 finance ministers and central bank chiefs said after a conference call yesterday to discuss the impact of the March 11 earthquake that they will “provide any needed cooperation.”
The Japanese currency weakened as the Fed and BOC’s actions followed those of the Bank of Japan, the European Central Bank, the Bank of England, the Bank of France, Germany’s Bundesbank and the Italian central bank. Japan’s authorities probably sold less than 2 trillion yen ($25 billion) in today’s foreign- exchange market intervention, a Japanese government official told reporters in Tokyo.
The yen’s decline against the dollar will be temporary unless it’s supported by higher U.S. interest rates, according to JPMorgan Chase & Co. The move shouldn’t be a “trend- changer,” said John Normand, the London-based head of currency strategy at JPMorgan.
The U.S. central bank has kept its benchmark lending rate at zero to 0.25 percent since December 2008. The Fed will boost the rate by 25 basis points in the last three months of the year, according to the median forecasts.
The yen’s weakness may be short-lived as Japan would need as much as $500 billion to intervene in markets just to match its previous efforts to curb the currency’s strength, according to Deutsche Bank AG.
An intervention of that magnitude will add about 10 percent of gross domestic product to Japan’s record debt level.
Dollar-yen has edged back under Y81.00, but otherwise has remained buoyant on the day in the wake of the coordinated intervention seen earlier (and assumed to be ongoing). So far, the Y81.20 area has acted as a pivot with stops kicking on a break above that level and stops kicking in as that level later gave way. The pair is reluctant for now to break below Y80.90/00, a prior low from Dec 31/Jan 3. How dollar-yen closes will be key for short-term direction. A close above Y82 (better yet, the 55-day at Y82.31) would be viewed as bullish and a sub Y80 close (Y79.90 Tenkan line of the Ichimoku cloud) viewed as bearish. A close in the Y80-Y82 range would be less instructive.
The euro is back in favor despite ongoing concerns about the peripherals and the new eurozone bank stress tests. First, the ECB is expected to raise rates well before the Fed. And with Friday's hefty intervention, the BOJ will likely be buying Treasuries which will keep downward pressure on US yields in the near-term. In addition, with oil prices remaining firm, oil producers who get dollar proceeds have been eager to convert a growing share of these proceeds into euros so as to diversify. Despite known euro negatives, the market continues to concentrate on the positives.
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